UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2005
(_) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number:
2-98997-NY
CHINA CABLE AND COMMUNICATION, INC.
(Exact name of Company as specified in its charter)
DELAWARE 11-2717273
-------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
No. 22 Bei Xin Cun Hou Street, Xiang Shan, Haidian District
Beijing 100093, the People's Republic of China
(Address of Principal Executive Offices) (Zip Code)
(86) 10-8259 9426
(Company's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
preceding 12 months (or for such shorter period that the Company was required to
file such reports) and (2) has been subject to filing requirements for the past
90 days.
Yes [X] No [ ]
The number of shares of Common Stock outstanding as of June 30, 2005 was
76,928,260.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
CHINA CABLE AND COMMUNICATION, INC.
FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..............................................2
Item 2. Management's Discussion and Analysis or Plan of Operations.......17
Item 3. Controls and Procedures..........................................25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......26
Item 3. Defaults Upon Senior Securities..................................26
Item 4. Submission of Matters to a Vote of Security Holders..............26
Item 5. Other Information................................................26
Item 6. Exhibits ........................................................26
SIGNATURES .................................................................28
Exhibit 31.1......Certification
Exhibit 31.2......Certification
Exhibit 32.1......Certification
Exhibit 32.2......Certification
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2005 2004
------------ ------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 199,994 $ 117,197
Accounts receivable, net of allowance for doubtful accounts of
$393,913 and $219,786 respectively 240,121 114,644
Prepayments and deposits 297,582 434,837
Inventories 508,924 341,446
Other current assets 59,300 111,450
------------ ------------
Total current assets 1,305,921 1,119,574
------------ ------------
NON-CURRENT ASSETS
Property and equipment, net 15,944,103 15,933,744
Intangible asset 1,770,032 1,830,374
Amount due from the holding company of the joint venture
partner 498,587 498,587
------------ ------------
Total non-current assets 18,212,722 18,262,705
------------ ------------
Total assets $ 19,518,643 $ 19,382,279
============ ============
LIABILITIES, MINORITY INTERESTS, REDEEMABLE
CONVERTIBLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,056,233 $ 4,143,583
Deferred revenue 642,102 476,814
Amount due to the preferred stockholders 5,208,611 4,784,497
Income tax payable 31,046 63,479
Amounts due to stockholders and directors 560,618 366,300
Amount due to a director of the joint venture -- 45,094
------------ ------------
Total current liabilities 10,498,610 9,879,767
------------ ------------
MINORITY INTERESTS, net 6,625,333 6,549,012
------------ ------------
(To be continued)
2
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
June 30, December 31,
2005 2004
------------ ------------
(Unaudited) (Audited)
STOCKHOLDERS' EQUITY
Preferred Stock, $0.0001 par value, 20,000,000 shares authorized, nil
shares issued -- --
Common Stock, $0.00001 par value; 100,000,000 shares authorized,
76,928,260 shares issued and outstanding at June 30, 2005 and
December 31, 2004 769 769
Additional paid-in capital 22,973,536 22,973,536
Comprehensive Income - Foreign exchange reserve 27,723 27,723
Deferred consulting fees (697,294) (1,245,538)
Accumulated deficit (19,910,034) (18,802,990)
------------ ------------
Total stockholders' equity 2,394,700 2,953,500
------------ ------------
Total liabilities and stockholders' equity $ 19,518,643 $ 19,382,279
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET SALES $ 1,256,581 $ 1,109,160 2,772,510 2,042,911
------------ ------------ ------------ ------------
COST AND EXPENSES
Consulting fees (194,643) (830,212) (548,244) (2,137,050)
Directors' compensation (32,692) (111,769) (104,739) (336,695)
Professional fees (63,521) (130,239) (199,229) (265,724)
Operating expenses (600,029) (310,180) (1,151,969) (559,479)
Administrative expenses (112,278) (116,084) (212,544) (246,682)
Depreciation (397,109) (362,612) (791,713) (725,201)
Amortization (30,171) (30,172) (60,342) (60,343)
------------ ------------ ------------ ------------
Total cost and expenses (1,430,443) (1,891,268) (3,068,780) (4,331,174)
------------ ------------ ------------ ------------
(LOSS) FROM OPERATIONS (173,862) (782,108) (296,270) (2,288,263)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Provision for bad debts -- -- (174,127) --
Interest income (expenses), net (228,867) 124 (308,419) 332
Other income (expenses), net (28,978) 69,103 (50,414) 77,513
------------ ------------ ------------ ------------
Total other income (expenses) (257,845) 69,227 (532,960) 77,845
------------ ------------ ------------ ------------
LOSS ON EXTINGUISHMENT OF DEBT
-- (1,174,183) -- (1,174,183)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES
(431,707) (1,887,064) (829,230) (3,384,601)
PROVISION FOR INCOME TAXES (57,351) (22,339) (57,351) (51,248)
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (489,058) (1,909,403) (886,581) (3,435,849)
MINORITY INTEREST (91,019) (200,861) (220,463) (322,769)
------------ ------------ ------------ ------------
NET LOSS (580,077) (2,110,264) (1,107,044) (3,758,618)
DEEMED DIVIDENDS -- (27,221) -- (60,249)
------------ ------------ ------------ ------------
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS $ (580,077) $ (2,137,485) $ (1,107,044) $ (3,818,867)
============ ============ ============ ============
Net loss per share - basic and diluted $ (0.01) $ (0.03) $ (0.01) $ (0.05)
Weighted average number of shares outstanding -
basic and diluted 76,928,260 73,467,837 76,928,260 72,940,386
The accompanying notes are an integral part of these consolidated financial
statements.
4
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Comprehensive
Common Stock at Additional Income-Foreign Deferred Retained Total
0.00001 par value Paid - Exchange Consulting Earnings Stockholders'
No. of Shares Amount In Capital Reserve Fees (Deficit) Equity
------------- --------- ------------ ---------- ------------ ------------ ------------
Balances,
January 1, 2004 72,312,760 $ 723 $ 21,356,799 $ 0 $ (1,934,192) $(11,947,932) $ 7,475,398
Shares issued to
directors as directors'
compensation 600,500 6 347,974 0 0 0 347,980
Shares issued to consultant
for financial advisory
services 4,015,000 40 1,875,660 0 0 0 1,875,700
Foreign exchange difference
arising from consolidation 0 0 0 27,723 0 0 27,723
Adjustment to reflect
preferred stocks becoming
mandatorily redeemable
at fair value 0 0 (606,897) 0 0 0 (606,897)
Deemed dividend arising
from beneficial conversion
feature of redeemable
convertible preferred stock 0 0 0 0 0 (60,249) (60,249)
Deferred consulting fees
- stock compensation 0 0 0 0 688,654 0 688,654
Net loss for the year
ended December 31, 2004 0 0 0 0 0 (6,794,809) (6,794,809)
------------ --------- ------------ --------- ------------ ------------ ------------
Balances,
December 31, 2004 76,928,260 $ 769 $ 22,973,536 $ 27,723 $ (1,245,538) $(18,802,990) $ 2,953,500
Deferred consulting fees
- stock compensation 0 0 0 0 548,244 0 548,244
Net loss for the period
ended June 30, 2005 0 0 0 0 0 (1,107,044) (1,107,044)
------------ --------- ------------ --------- ------------ ------------ ------------
Balances,
June 31, 2005 76,928,260 $ 769 $ 22,973,536 $ 27,723 $ (697,294) $(19,910,034) $ 2,394,700
============ ========= ============ ========= ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (1,107,044) $ (3,758,618)
Adjustments to reconcile net loss to net cash generated from (used
in) operating activities:
Loss on extinguishment of debt -- 1,174,183
Common stocks and warrants issued for consulting fees -- 700,000
Deferred consulting fees expensed, net 548,244 1,401,050
Common stocks issued for directors' compensation -- 249,900
Directors' compensation payable by common stocks 30,380 --
Depreciation and amortization 852,055 785,544
Minority interest 220,463 322,769
Bad debts 174,127 --
Interest due to preferred stockholder 424,114 --
Changes in operating assets and liabilities:
Decrease (Increase) in:
Cash held in trust account -- 149,628
Accounts receivable (299,604) (107,369)
Prepayments and deposits 137,255 --
Inventories (167,478) (111,929)
Other current assets 52,150 18,891
Increase (Decrease) in:
Accounts payable and accrued liabilities (87,350) 625,815
Deferred revenue 165,288 --
Income tax payable (32,433) (82,714)
Amounts due to stockholders and directors 163,938 11
Amount due to a director of the joint venture (45,094) --
------------ ------------
Net cash generated from operating activities 1,029,011 1,367,161
------------ ------------
Cash flows from investing activities:
Increase in cash in connection with the consolidation of
joint venture -- 45,859
Increase in amount due from the joint venture partner (144,142) (514,529)
Purchase of property and equipment (808,123) (963,407)
Proceeds from disposal of property 6,051 --
------------ ------------
Net cash used in investing activities (946,214) (1,432,077)
------------ ------------
Cash flows from financing activities: -- --
------------ ------------
Net increase (decrease) in cash and cash equivalents 82,797 (64,916)
Cash and cash equivalents at beginning of year 117,197 173,967
------------ ------------
Cash and cash equivalents at end of year $ 199,994 $ 109,051
============ ============
Supplementary disclosures of cash flow information
Income and value added taxes paid $ 154,706 $ 100,586
============ ============
Supplemental Schedule of non-cash financing activities:
Common stock and warrants issued for consulting and directors' fees $ -- $ 876,400
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated unaudited financial statements have been prepared by
the Company and include all material adjustments which, in the opinion of the
management, are necessary for a fair presentation of financial results for the
six months ended June 30, 2005. All adjustments and provisions included in these
statements are of a normal recurring nature.
Certain information and footnote disclosures made in the most recent annual
consolidated financial statements included in the Form 10-KSB for the year ended
December 31, 2004 have been condensed or omitted for the interim financial
statements; accordingly, the interim financial statements should be read in
conjunction with the December 31, 2004 consolidated financial statements. The
results of operations for the interim period presented are not necessarily
indicative of the results that can be expected for the entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the amount of revenues and expenses during the reporting periods. Management
makes these estimates using the best information available at the time the
estimates are made. However, actual results could differ materially from those
results.
2. GOING CONCERN
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values. We incurred a net loss of $1,107,044 and $3,818,867 for the six months
ended June 30, 2005 and 2004, respectively, and our current liabilities exceeded
our current assets by $9,192,689 at June 30, 2005. These factors create
substantial doubt about our ability to continue as a going concern.
Company management continues to evaluate the Company's cash needs and the
availability of debt and equity financing to fund the Company's operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies adopted in these interim consolidated unaudited
financial statements are consistent with those set out in the Company's audited
consolidated financial statements for the year ended December 31, 2004.
Basis of Consolidation
The interim consolidated financial statements include the financial statements
of the Company and its wholly owned subsidiary, Broadway Offshore Limited
("Broadway") and its 49% equity interest in Baoding Pascali Broadcasting Cable
Television Integrated Information Networking Co., Ltd. (the "Joint Venture"),
collectively its subsidiaries. All significant inter-company balances and
transactions, including inter-company profits and unrealized profits and losses,
are eliminated on consolidation.
The Joint Venture is a Sino-foreign joint venture established in the People's
Republic of China (the "PRC"), between Broadway and Baoding Pascali Multimedia
Transmission Networking Co., Ltd. ("Baoding Multimedia"), which is a subsidiary
of Baoding Pascali Group Co., Ltd., a Chinese state-owned enterprise.
Prior to December 31, 2003, Baoding's joint venture partners consisted of the
Company and Baoding Multimedia with ownership interests of 49% and 51%,
respectively. In addition, Baoding Multimedia had the majority of the Joint
Venture's board seats of the Board of Directors. Accordingly, the Company
accounted for its investment in the Joint Venture using the equity method of
accounting for the year ended December 31, 2003.
7
On December 29, 2003, the Joint Venture agreement was amended whereby Baoding
Multimedia granted 3% of its 51% interest in the Joint Venture to Baoding Cable
Television Employees' Shareholding Association ("BCTESA"), as well as one seat
on the Board of Directors.
Effective January 1, 2004, the Joint Venture agreement between the Company and
Baoding Multimedia was further amended whereby the Company assumed effective
control of the board of directors of the Joint Venture by appointing five out of
nine of its directors under the PRC Sino-foreign Joint Venture Law. The other
four directors consist of three directors for Baoding Multimedia and one
director for BCTESA. In addition, the Company filled key management positions at
the Joint Venture, including the position of Chief Financial Officer and General
Manager, with persons affiliated with the Company.
The Board of Directors of the Joint Venture serves a term of four years with no
term limits. Changes in the Board of Director members can only be made after a
unanimous vote of the Board. The Board of Directors is the highest authority of
the Joint Venture and executes policy, operational matters and passes
resolutions of the Joint Venture. As a result, control of the Board of Directors
of the Joint Venture enables the Company to significantly influence the
operations of the Joint Venture. Accordingly, since January 1, 2004, the Company
has accounted for the Joint Venture as a subsidiary and its accounts are
consolidated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the amount
of revenues and expenses during the reporting periods. Management makes these
estimates using the best information available at the time the estimates are
made. However, actual results could differ materially from those results.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, demand and time deposits with
banks and liquid investments with an original maturity of three months or less.
Inventories
Inventories, being consumables and network replacement parts, are stated at
cost. Cost is determined on a first-in, first-out basis, and includes all costs
of purchase, costs of conversion, and other costs incurred in bringing the
inventories to their present location and condition.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation,
amortization and impairment losses, and are depreciated at rates sufficient to
write off their cost, after taking into account their estimated residual value,
over their estimated useful lives on a straight-line basis. The expected useful
lives are as follows:
Leasehold improvements 25 years
Machinery and equipment 7 to 15 years
Furniture, fixtures and equipment 7 to 10 years
Motor vehicles 7 years
The useful lives of assets and depreciation and amortization methods are
reviewed periodically.
Construction in progress includes direct costs of constructing equipment and new
cable and fiber optic networks. Interest incurred during the period of
construction has not been capitalized, as such amounts are not material.
Construction in progress is not depreciated until such time as the assets are
completed and put into operational use.
8
Intangible assets
The intangible asset is an exclusive right to operate a cable TV network and is
amortized on a straight-line basis over a period of twenty years.
Impairment
The Company applies the provisions of Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"), issued by the Financial Accounting Standards Board ("FASB"). SFAS No.
144 requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable through the estimated undiscounted cash flows expected to
result from the use and eventual disposition of the assets. Whenever any such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.
The Company tests its long-lived assets, including property and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company has identified this lowest level to be principally
the cable TV network in a specific region of Baoding city. The Company considers
historical performance and future estimated results in its evaluation of
potential impairment and then compares the carrying amount of the asset to the
future estimated cash flows expected to result from the use of the asset. If the
carrying amount of the asset exceeds estimated expected undiscounted future cash
flows, the Company measures the amount of impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
measured by discounting expected future cash flows as the rate the Company
utilizes to evaluate potential investments. The Company estimates fair value
based on the information available in making whatever estimates, judgments and
projections are considered necessary. There was no impairment of long-lived
assets in the periods ended June 30, 2005 and 2004.
Redeemable convertible preferred stock
In connection with the issuance of the redeemable convertible preferred stock in
2003, the Company recorded deemed dividends of $4,000,000 arising from the
beneficial conversion feature embedded within the preferred stock in accordance
with the provisions of Emerging Issues Task Force Consensus Nos. 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", and 00-27 "Application of Issue No.
98-5 to Certain Convertible Instruments" and $60,249 of accretion for the year
ended December 31, 2004. The deemed dividends arise from the allocation of
proceeds raised to the detachable warrants issued to the preferred stockholders,
as well as due to the effective conversion price based on the proceeds allocated
to the preferred stock being below the fair market value of the Company's common
stock on the date of issuance. The beneficial conversion feature is limited to
the total proceeds raised of $4,000,000. During the period ended June 30, 2005,
the redeemable convertible preferred stock was redeemed by the preferred
stockholders.
Income taxes
The Company accounts for income taxes using an asset and liability approach
which allows for the recognition and measurement of deferred tax assets based
upon the likelihood of realization of tax benefits in future years. Under the
asset and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future deductibility is uncertain. No
provision for deferred taxation has been made, as there are no temporary
differences at the balance sheet date.
Stock based compensation
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123, which defines a fair-value-based method of accounting for stock based
employee compensation and transactions in which an entity issues its equity
instruments to acquire goods and services from non-employees. Stock compensation
for stock granted to non-employees has been determined in accordance with SFAS
No.123 and the Emerging Issues Task Force consensus in Issue No. 96-18,
"Accounting for Equity Instruments that are issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services" ("EITF 96-18"), as
the fair value of the consideration received or the fair value of equity
instruments issued, whichever is more reliably measured.
9
Earnings per share
The Company has presented a dual presentation of basic and diluted earnings per
share ("EPS") with a reconciliation of the numerator and denominator of the EPS
computations. Basic EPS amounts are based on the weighted average shares of
common stock outstanding. Diluted EPS assumes the conversion, exercise or
issuance of all potential common stock instruments such as options, warrants and
convertible securities, unless the effect is to reduce a loss or increase
earnings per share. All potential dilutive financial instruments as of June 30,
2005 had the effect of reducing the reported net loss per share, and therefore,
were excluded from the calculation.
Foreign Currency Translations and Transactions
The Renminbi ("RMB"), the national currency of the PRC, is the primary currency
of the economic environment in which the operations of the Joint Venture are
conducted. The Company uses the United States dollar ("U.S. dollars") for
financial reporting purposes.
The Company translates the Joint Venture's assets and liabilities into U.S.
dollars using the applicable unified exchange rates quoted by the People's Bank
of China prevailing at the balance sheet date, and the statement of income is
translated at average unified exchange rates during the reporting period.
Adjustments resulting from the translation of the Joint Venture's financial
statements from RMB into U.S. dollars are recorded in shareholders' equity as
part of accumulated comprehensive income.
Transactions denominated in currencies other than RMB are translated into RMB at
the unified exchange rates prevailing at the transaction dates. Gains or losses
resulting from transactions in currencies other than RMB are reflected in the
statement of income of the Joint Venture for the reporting periods.
On July 21, 2005, the PRC government changed its decade-old policy of pegging
the value of the RMB to the U.S. dollar. Under the new policy, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an
approximately 2.0% appreciation of the RMB against the U.S. dollar. While the
international reaction to the RMB revaluation has generally been positive, there
remains significant international pressure on the PRC government to adopt an
even more flexible currency policy, which could result in a further and more
significant revaluation of the RMB against the U.S. dollar. Any significant
revaluation of RMB may be attributable to adjustments resulting from the
translation of the Joint Venture's financial statements which will be recorded
as part of accumulated comprehensive income in shareholders' equity.
Revenue recognition
Revenue from the provision of subscription television services is recognized at
the time when the services are provided. Customers are billed on a quarterly
basis for the analog television services and on an annual basis for the digital
television services. High-speed internet service customers are billed on a
monthly basis. Prepayment from all of the customers is deferred to the
appropriate period of service. Installation fee income is recognized upon
completion of the related installation work.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1") which provides new guidance for assessing impairment losses on
debt and equity investments. Additionally, EITF 03-1 includes new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of EITF 03-1. The
Company will evaluate the effect, if any, of EITF 03-1 when final guidance is
released.
In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151, Inventory Costs, which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151
will have a material impact on our consolidated financial statements.
10
In December 2004, the FASB issued SFAS No. 123-R, Share Based Payments, which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. The cost will be measured based on the estimate fair value
of the equity or liability instruments issued. SFAS 123-R covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Management believes the adoption of this pronouncement will not
have a material effect on our consolidated financial statements.
Also, in December 2004, the FASB issued SFAS 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that the exchange of non-monetary assets should be measured using the estimated
fair market value of the assets exchanged. SFAS No. 153 eliminates the narrow
exception for non-monetary exchanges of similar productive assets, and replaces
it with a broader exception for exchanges of non-monetary assets that do not
have commercial substance. A non-monetary exchange has "commercial substance" if
the future cash flows of the entity are expected to change significantly as a
result of the transaction. This pronouncement is effective for monetary
exchanges in fiscal periods beginning after June 15, 2005. Management believes
the adoption of this pronouncement will not have a material effect on our
consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3".
This statement replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements",
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. This statement is effective for accounting
changes and correction of errors made in fiscal years beginning after December
15, 2005. Management believes the adoption of this pronouncement will not have a
material effect on our consolidated financial statements.
In June 2005, the FASB ratified the EITF consensus to amend EITF No. 96-16,
"Investor's Accounting for an Investee When the Investor Has a Majority of the
Voting Interest but the Minority Shareholders Have Certain Approval or Veto
Rights." The EITF agreed to amend the Protective Rights section of this
consensus, as well as Example of Exhibit 96-16A, to be consistent with the
consensus reached in Issue No. 04-5, "Determining Whether a General Partner, or
the General Partners as a Group, Controls a Limited Partnership or Similarly
Entity When the Limited Partners Have Certain Rights." The provisions of this
amendment should be applied prospectively to new investments and to investment
agreements that are modified after June 29, 2005. Management believes the
adoption of this pronouncement will not have a material effect on our
consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed
by management to have a material impact on the Company's present or future
consolidated financial statements.
5. INVENTORIES
As of June 30, 2005 and December 31, 2004, inventories consisted of the
following:-
June 30, December 31,
2005 2004
Raw materials $327,894 $141,152
Finished product 181,030 200,294
-------- --------
Total $508,924 $341,446
======== ========
11
6. PROPERTY AND EQUIPMENT
June 30, December 31,
2005 2004
Leasehold improvements $ 78,105 $ 84,156
Machinery and equipment 17,811,563 17,718,296
Furniture, fixtures and equipment 131,963 127,073
Motor vehicles 358,456 295,659
------------ ------------
18,380,087 18,225,184
Less: Accumulated depreciation (6,161,447) (5,369,734)
------------ ------------
12,218,640 12,855,450
Construction in progress 3,725,463 3,078,294
------------ ------------
$15,944,103 $ 15,933,744
============ ============
7. INTANGIBLE ASSETS
June 30, December 31,
2005 2004
Exclusive right to operate cable TV network $ 2,413,687 $ 2,413,687
Less: Accumulated amortization (643,655) (583,313)
----------- -----------
$ 1,770,032 $ 1,830,374
=========== ===========
The amortization expense for the period ended June 30, 2005 amounted to $60,342.
8. AMOUNTS DUE TO STOCKHOLDERS AND DIRECTORS
The amounts due to stockholders and directors are unsecured, non-interest
bearing and repayable on demand.
June 30, December 31,
Name 2005 2004
----------- ------------
Stockholder:
Faithful Union Limited $143,400 $263,882
Stockholder and Director:
Raymond Ying-Wai Kwan, CEO 38,592 15,767
Yau-Sing Tang, CFO 373,004 86,651
George Raney, Director 4,340 -
Paul Zee-Ho Tsang, Director 1,282 -
-------- --------
Total $560,618 $366,300
======== ========
12
For the period ended June 30, 2005, the Company repaid $120,482 to Faithful
Union Limited, a company wholly owned by Mr. Hong Tao Li, a Director, Chief
Operating Officer and Vice-President of Project Development and as a result, the
Company still owed this shareholder $143,400 as of June 30, 2005.
For the period ended June 30, 2005, Mr. Yau Sing Tang, CFO and Director of the
Company paid various expenses of $58,411 on behalf of the Company. The Company
also owed him total salaries of $44,872 and director's shares valued at $18,600
for the period ended June 30, 2005. Mr. Tang also advanced $206,758 to the
Company during the period ended June 30, 2005. The Company paid him the salaries
of $42,288 for the period ended June 30, 2005. In total, the Company owed him
the amount of $373,004 as of June 30, 2005.
For the period ended June 30, 2005, the Company owed Mr. Raymond Ying Wai Kwan,
CEO and Director of the Company total salaries of $26,923 and director's shares
valued at $7,440. The Company paid him the salaries of $11,538 for the period
ended June 30, 2005. In total, the Company owed him the amount of $38,592 as of
June 30, 2005.
For the period ended June 30, 2005, the Company owed Mr. George Raney, Director
of the Company, director's shares valued at $4,340.
For the period ended June 30, 2005, the Company owed Mr. Zee-Ho Tsang, Director
of the Company, director's fee of $2,564. The Company paid him the director fee
of $1,282 for the period ended June 30, 2005. In total, the Company owed him the
amount of $1,282 as of June 30, 2005.
9. AMOUNT DUE TO A DIRECTOR OF THE JOINT VENTURE
As of December 31, 2004, the Company's Joint Venture owed an amount of $45,094
to one of the directors of the Company's Joint Venture. The amount owed
represents the personal bank loan taken up by such director for office premises
acquired by the Company's Joint Venture in 2004. The amount was wholly repaid
before June 30, 2005.
10. 8% REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 24, 2003, the Company completed the sale of 2,758,621 shares of the
Company's restricted 8% Redeemable Convertible Preferred Stock, par value
$0.0001 per share (the "Preferred Stock"), to Gryphon Master Fund, L.P., a
Bermuda limited partnership (the "Purchaser"), for $1.45 per share (the
"Purchase Price"), or an aggregate purchase price of $4,000,000. The Purchase
Price per share of the Preferred Stock was calculated based upon 90% of the
moving average closing price of the Company's common stock for the 60 trading
days immediately prior to entering into the agreement. The fair market value of
the Company's common stock as of September 24, 2003 was $2.85 per share. In
connection with this transaction, the Company also issued warrants to the
Purchaser to purchase up to 827,586 shares of the Company's restricted common
stock at an exercise price $2.18 per share until September 24, 2008 (the
"Warrants"). The sale of the Preferred Stock and the Warrants to the Purchaser
was made in a private placement transaction with reliance upon an exemption from
registration under Section 4(2) of the Securities Act of 1933.
The Preferred Stock accrues dividends at the rate of 8% of the Purchase Price
per share per annum, payable when, as and if declared by the Board of Directors
on September 30 and March 31 of each year commencing on March 31, 2004. The
Preferred Stock is senior to the common stock with respect to the payment of
dividends, redemption payments and rights upon liquidation, dissolution or
winding up of the affairs of the Company. Upon liquidation, the Preferred Stock
is entitled to receive a liquidation preference equal to the Purchase Price plus
the amount of accrued and unpaid dividends.
The Company was required to redeem all then outstanding shares of Preferred
Stock on September 24, 2008, the fifth anniversary of the date on which the
preferred stock was issued, at a redemption price equal to the Purchase Price,
plus accrued but unpaid dividends. However, if the "Current Market Price"
(defined as the volume weighted average price of the Company's common stock on
the 10 consecutive trading days immediately preceding such date as reported on
the Over-the-Counter Bulletin Board of the Company's Common Stock) is equal to
or less than $0.70 for a period of 10 consecutive trading days, the holders of
the Preferred Stock have the right to require the Company to redeem all or any
portion of the Preferred Stock at a redemption price, in cash, equal to $1.67
per share, plus all accrued but unpaid dividends.
13
The fair value of the Preferred Stock with the conversion feature and the
warrants, calculated based on available market data using appropriate valuation
models, was determined to be in excess of the net proceeds of $3,642,150
received by the Company from the Purchaser, and the minimum Preferred Stock
redemption amount of $4,000,000. Therefore, the Preferred Stock was recorded at
the minimum redemption amount of $4,000,000, less related transactions costs of
$660,563 to be adjusted in subsequent periods for accretion adjustments and
accrued and unpaid dividends.
On September 24, 2003, the Company also issued 18,391 shares of restricted
common stock to Trenchant Operating LLC ("Trenchant"), in consideration for
services performed by Trenchant in finding the Purchaser. In addition, the
Company issued warrants to Trenchant to purchase 91,954 shares of common stock,
with an exercise price equal to $2.18 per share until September 25, 2008. The
fair market value of the Company's commons stock as of September 24, 2003 was
$2.85. The fair value of the warrants was determined to be $250,299 as of the
date of grants using the Black-Scholes pricing option valuation model, which
assumed a risk free interest rate of approximately 3.07%, an expected life of 5
years, and a volatility rate of 171%.
On June 14, 2004 the Purchaser requested that the Company redeem the Preferred
Stock, as the market price of the Company's common stock was equal to or less
than $0.70 per share for more than ten consecutive trading days. On July 26,
2004, the Purchaser filed a complaint in the United States District Court for
the Northern District of Texas, Dallas Division alleging that the Company
breached its contract by failing to redeem the Preferred Stock. The Purchaser is
seeking the redemption price of $4,606,897; plus unpaid dividends equal to
$220,226 and interest accruing at $888 per day from June 14, 2004 until the date
of redemption; pre-judgment and post-judgment interest; attorneys' fees; court
costs; and other such relief.
On June 20, 2005, the Company and the Purchaser represented to the Court that
they had agreed to an entry of judgment on the Purchaser's claim against the
Company. Therefore, the Purchaser was granted a judgment against the Company in
the amount of $5,165,119.99. The Purchaser was also granted recovery of
post-judgment interest on the judgment at a rate of 6% per annum from June 20,
2005 until the judgment is paid by the Company. In a separate agreement, the
Company agreed to pay the Purchaser a sum of $35,000 to cover legal costs
incurred by the Purchaser in two installments: $20,000 on or before June 30,
2005 and $15,000 on or before July 31, 2005. In exchange for the $35,000
payment, the Purchaser agreed not to execute on the agreed judgment on or before
September 30, 2005. Subsequent to June 30, 2005, the Company completed payment
of the $35,000 to the Purchaser.
In accordance with Financial Accounting Standards Board SFAS 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity", the Company has accounted for the judgment debt of $5,165,120, together
with post-judgment interest of $8,491 for the period from June 21, 2005 to June
30, 2005 and the compensation amount of $35,000 as a current liability on its
consolidated balance sheet. The Company has accounted for the difference between
the minimum Preferred Stock redemption amount of $4,000,000 and the cash
redemption price of $ 4,606,897 as a reduction in Additional Paid-in Capital for
the year ended December 31, 2004. In addition, for the year ended December 31,
2004, the Company has expensed unamortized transaction costs amounting to
$567,286 relating to the original Preferred Stock issuance. For the period ended
June 30, 2005, the Company expensed the difference between the judgment debt and
the recorded amount due to the Purchaser as of December 31, 2004 of $309,194 as
other interest expenses and the compensation amount of $35,000 as other expenses
on the Company's consolidated statement of operations and comprehensive income.
11. INCOME TAXES
Broadway Offshore is a British Virgin Islands investment holding company that
does not carry on any business and does not maintain any offices in the United
States of America. Therefore, no provision for United States income taxes or tax
benefits for the Company has been made.
Baoding is a Sino-foreign joint venture established in the PRC. Baoding was
subject to a 3% local income tax for the year ended December 31, 2002 and 18%
(15% federal income tax plus 3% local income tax) for the year ended December
31, 2003 and 13% (10% federal income tax plus 3% local income tax) for future
years, on the results of its operations after adjusting for items which are
non-assessable or disallowed. Certain items of income and expense are recognized
for PRC income tax purposes in a different accounting period from that in which
they are recognized for financial accounting purposes. Baoding's operation in
the PRC for the periods ended June 30, 2005 and 2004 resulted in a profitable
operation, while loss was incurred on the Company level.
14
12. DIRECTORS' COMPENSATION IN SHARES AND WARRANTS
The Company signed two-year directors' stock compensation agreements (the
"Agreements") with three of its directors, Mr. George Raney, Mr. Raymond
Ying-Wai Kwan, and Mr. Yau-Sing Tang on February 28, 2003. Pursuant to the
Agreements, the Company will issue an aggregate of 49,000 shares of common stock
each month in consideration for their services rendered through February 2005.
Since the expiry of the Agreements on February 28, 2005, the Company has not yet
renewed the stock compensation agreements with the directors. As of June 30,
2005, the Company did not issue the 98,000 director's shares of common stock
valued at $30,380 to the directors.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues
Task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), the Company accrued for the
directors' compensation in shares and warrants based on the fair market value of
the Company's common stock at the period end. During the six months ended June
30, 2004, 294,000 shares of the Company's common stock under the Company's 2003
Stock Compensation Plan were issued to the directors. No shares of the Company's
common stock were issued for the six months ended June 30, 2005.
13. CONSULTING AGREEMENTS AND DEFERRED CONSULTING FEES
For the year ended December 31, 2004, the Company issued a total of 4,015,000
shares of the Company's common stock to several consultants as consideration for
consultation and advisory services rendered and to be rendered over a period
ranging from one month to eighteen months. For the period ended June 30, 2005,
no shares were issued.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues
Task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), the Company has accounted for the
consulting agreements based on the fair market value of the Company's common
stock at the commencement date of the individual consulting agreements. For the
six months ended June 30, 2005 and 2004, the Company charged to expense a total
of $548,244 and $2,137,050, respectively associated with consulting agreements
and recorded deferred consulting fees of $697,294 and $1,245,538 respectively at
June 30, 2005 and December 31, 2004. The deferred consulting fees will be
charged to expenses as follows:
Year ending December 31 Amount
2005 $ 393,565
2006 303,729
-----------
Total $ 697,294
===========
For the periods ended June 30, 2005 and 2004, no warrants were granted or
exercised. As of June 30, 2005, the following warrants were still outstanding:
- ---------------------------------------------------------------------------------------------------------------
Warrant-holder No. of warrants Exercise Price Exercise Period
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Patrick Ko 250,000 $0.45 Five years starting from May 3, 2003
- ---------------------------------------------------------------------------------------------------------------
Ni Rong-song 1,000,000 $0.45 Five years starting from May 30, 2003
- ---------------------------------------------------------------------------------------------------------------
Friedland Capital Inc. 100,000 $1.50 Three years starting from August 22, 2003
- ---------------------------------------------------------------------------------------------------------------
15
14. MINORITY INTEREST
The minority interest comprises the following:-
As of June 30, 2005 December 31, 2004
------------- -----------------
Share in the net assets of the joint venture $ 8,829,299 $ 8,608,836
Less: Amount due from the PRC joint venture partner (2,203,966) (2,059,824)
---------- ----------
Net amount $ 6,625,333 $ 6,549,012
========== ==========
For the six months ended June 30, 2005 and 2004, the Company recorded a
reduction to income of $220,463 and $332,769 respectively, representing the
other partners' share in the income of the joint venture. The Company also
recorded a minority interest of $8,829,299 and $8,608,836 as of June 30, 2005
and December 31, 2004 respectively, representing the other partners' share in
the net assets of the joint venture. The balance of the minority interest as of
June 30, 2005 and December 31, 2004 was reduced by receivables due from
Baoding's 48% joint venture partner in anticipation of the proposed dividend on
the Baoding joint venture as described below.
The amount due from the PRC joint venture partner was not trade in nature. The
amount was unsecured, interest free and is due for repayment by December 31,
2005.
The Board of directors of Baoding joint venture has proposed the distribution of
a cash dividend to its joint venture partners in the amount of RMB36 million
(equivalent to approximately US$4,337,300). The payment of such dividend is
contingent upon the approval of SAFE (State Administration of Foreign Exchange)
and of the local PRC tax bureau. Baoding joint venture is in the process of
obtaining a tax clearance certificate from the local PRC tax bureau in order to
get the approval for the declaration of dividend. The local PRC tax bureau needs
to review Baoding joint venture's up-to-date tax filings to ensure all of the
enterprise and value-added taxes have been properly paid up to December 31,
2004.
Under the current PRC foreign joint venture law, Baoding joint venture cannot
formerly declare the dividend until formal approvals from SAFE and local PRC tax
bureau have been obtained.
The Baoding joint venture intends to offset the amount of dividend to be
declared to its PRC joint venture partner with the amount due from the PRC joint
venture partner. Such offset of dividend declared is permitted under the current
PRC laws. In the books of the Baoding joint venture, the dividend to be declared
has not yet been accrued.
15. EARNINGS (LOSS) PER COMMON SHARE
Basic EPS amounts are based on the weighted average shares of common stock
outstanding. Diluted EPS assumes the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants and convertible
securities, unless the effect is to reduce a loss or increase earnings per
share. All potential dilutive financial instruments as of June 30, 2005 had the
effect of reducing the reported net loss per share, and, therefore, were
excluded from the calculation.
16. SEGMENT REPORTING
The Company operates in three principal business segments. Management believes
that the following table presents useful information to the chief operation
decision makers for measuring business performance and financing needs and
preparing the corporate budget, etc. As all the Company's customers are located
in Baoding City, China and the Company's revenues are generated in Baoding, no
geographical segment information is presented.
16
Analog Digital High speed
For the six months ended Television Television Internet
June 30, 2005 Services Services Services Corporate Total
- -------------- -------- -------- -------- --------- -----
Net Sales $ 1,983,287 $ 686,605 $ 102,618 $ -- $ 2,772,510
Consulting fees -- -- -- (548,244) (548,244)
Directors' compensation -- -- -- (104,739) (104,739)
Professional fees -- -- -- (199,229) (199,229)
Operating expenses (467,437) (562,075) -- (122,457) (1,151,969)
Administrative expenses (212,544) -- -- -- (212,544)
Depreciation (791,713) -- -- -- (791,713)
Amortization (60,342) -- -- -- (60,342)
Profit (Loss) from operation 451,251 124,530 102,618 (974,669) (296,270)
Analog Digital High speed
For the six months ended Television Television Internet
June 30 , 2004 Services Services Services Corporate Total
- -------------- -------- -------- -------- --------- -----
Net Sales $ 1,948,092 $ -- $ 94,819 $ -- $ 2,042,911
Consulting fees -- -- -- (2,137,050) (2,137,050)
Directors' compensation -- -- -- (336,695) (336,695)
Professional fees -- -- -- (265,724) (265,724)
Operating expenses (404,446) -- -- (155,033) (559,479)
Administrative expenses (246,682) -- -- -- (246,682)
Depreciation (725,201) -- -- -- (725,201)
Amortization (60,343) -- -- -- (60,343)
Profit (Loss) from operation 511,420 -- 94,819 (2,894,502) (2,288,263)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This quarterly report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or the
Company's future financial performance. The Company has attempted to identify
forward-looking statements by terminology including "anticipates," "believes,"
"expects," "can," "continue," "could," estimates," "intends," "may," "plans,"
"potential," "predict," "should" or "will" or the negative of these terms or
other comparable terminology. Although the Company believes that the
expectations reflected in the forward-looking statements are reasonable, the
Company cannot guarantee future results, level of activity, performance or
achievements. The Company expectations are as of the date this Form 10-QSB is
filed, and the Company does not intend to update any of the forward-looking
statements after the date this quarterly report on Form 10-QSB is filed to
confirm these statements to actual results, unless required by law.
Overview
The Company was incorporated in the State of Delaware on November 27, 1984.
Prior to February 2003, the Company had no business operations. From February
2003, as a result of a reverse merger, the Company, through its wholly-owned
subsidiary, Broadway Offshore Limited ("Broadway Offshore"), which was
incorporated under the laws of the British Virgin Islands, has owned 49% of the
issued and outstanding shares of capital stock on a fully diluted basis of
Baoding Pascali Broadcasting Cable Television Integrated Information Networking
Co., Ltd. (the "Joint Venture"). The Joint Venture is a Sino-foreign joint
venture established in the People's Republic of China (the "PRC"), between
Broadway Offshore and Baoding Pascali Multimedia Transmission Networking Co.,
Ltd. ("Baoding Multimedia"), which is a subsidiary of Baoding Pascali Group Co.,
Ltd., a Chinese state-owned enterprise.
17
The Joint Venture was formed on July 23, 1999, when Baoding Multimedia and Solar
Touch signed a joint venture contract (the "JV Agreement") and the articles of
association of the Joint Venture (the "JV Articles"). The JV Agreement and JV
Articles provide that the total amount of investment of the Joint Venture was
RMB122.425 million (or approximately US$14.8 million) and that the registered
capital stock of the Joint Venture was RMB70 million (or approximately US$8.46
million). The JV Agreement and JV Articles also provide that Baoding
Multimedia's contribution to the Joint Venture was Baoding Multimedia's network
and related facilities with a value of RMB21.7 million, plus intangible assets
(including licenses and business goodwill) valued at RMB14 million which was
equal to 51% of the registered capital of the Joint Venture and that Solar
Touch's contribution was an investment of US$4.14 million (or RMB34.3 million)
in cash which was equal to 49% of the registered capital. On July 28, 1999, the
Management Commission of the Baoding Hi-Tech Industrial Development Area
approved the JV Agreement and JV Articles as well as the members of the board of
directors of the Joint Venture. On August 5, 1999, a Certificate of Approval for
Establishment of Enterprises with Foreign Investment in the PRC for the Joint
Venture was issued and on August 16, 1999, the Business License for the
operations of the Joint Venture was issued.
On February 23, 2000, Baoding Multimedia and Solar Touch signed another
agreement to increase the Joint Venture's registered capital from RMB70 million
to RMB100 million, provided, however, that the parties' respective percentage of
equity interests in the Joint Venture shall remain the same. On February 24,
2000, the Management Commission of the Development Area approved the increase in
the Joint Venture's registered capital from RMB70 million to RMB100 million. On
September 6, 2000, a revised Business License was issued to reflect the increase
in the Joint Venture's registered capital.
On May 6, 2003, Solar Touch transferred its 49% interest in the Joint Venture to
its wholly-owned subsidiary, Broadway Offshore. On December 29, 2003, Baoding
Multimedia transferred a 3% interest in the Joint Venture to the Baoding Pascali
Cable Television Network Workers Stockholding Association. On the same date, the
JV Agreement and JV Articles were amended to reflect the correct shareholdings
of Broadway Offshore, Baoding Multimedia and Baoding Pascali Cable Television
Network Workers Stockholding Association. Also, the total number of board of
directors of the Joint Venture increased to nine pursuant to the Amended Joint
Venture Agreement dated December 29, 2003 (the "Amended JV Agreement"). In
February 2004, the Company sold its intermediate holding company, Solar Touch,
to an independent third party and as a result, the Company directly owns a 100%
interest in Broadway Offshore.
The Joint Venture operates a cable television network in the municipality of
Baoding, near Beijing in the PRC. The Joint Venture has over 200,000 subscribers
in a market with a population of over 10 million. The Company believes that the
Joint Venture is at present the only Sino-foreign joint venture approved by the
State Administration of Radio, Film and Television to be licensed as a cable
television network operator in the PRC. The Company believes that it is the
first and only joint venture allowed to have a foreign investor invest in and to
operate the cable television network in the PRC.
The board of directors of the Joint Venture currently has nine members, five of
whom were appointed by the Company. Pursuant to the Amended JV Agreement dated
December 29, 2003, Broadway Offshore has the right to appoint five of the nine
members of the Board of the Joint Venture. Through those five appointed
directors, the Company has obtained control of the board of directors of the
Joint Venture and the Company's Board of Directors has filled key management
positions at the Joint Venture, including Chief Financial Officer and General
Manager, with persons affiliated with the Company. As a foreign investor, the
Company, through its predecessor, has become the single largest interest holder
of the Joint Venture and has actively participated in the management of the
Joint Venture.
In view of China's accession to the World Trade Organization, it is expected
that further opening of the cable television market in China will take place in
the near future. Being the first foreign investor to be allowed to own an
interest in a Chinese cable operator and with the experience gained through the
years, the Company believes it is at an advantageous position to increase its
ownership interest in the Joint Venture beyond the current 49% level, should it
be allowed to do so in the future.
According to its business license and the current relevant rules and
regulations, the Joint Venture is allowed to acquire and own networks in areas
other than Baoding. Therefore, when opportunities arise, the Joint Venture may
try to expand its business beyond Baoding, in which case, the Company may assist
the Joint Venture in raising capital for such expansion, although there cannot
be any assurance of such expansion.
On July 1, 2003, the Company changed its name from Nova International Film, Inc.
to China Cable and Communication, Inc.
18
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements requires it to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, and which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from these estimates
under different assumptions or conditions.
The Company considers the following accounting policies to be both those most
important to the portrayal of our financial condition and those that require the
most subjective judgment:
Investment in Joint Venture: On and before December 31, 2003, the Company
accounted for its 49% ownership interest in the Joint Venture using the equity
method of accounting. However, effective on January 1, 2004, the Company assumed
control of the board of directors of the Joint Venture by appointing five out of
nine of its directors and filled key management positions at the Joint Venture,
including the position of Chief Financial Officer and General Manager, with
persons affiliated with the Company. Accordingly, effective on January 1, 2004,
the Company has accounted for the Joint Venture as a subsidiary and its accounts
are consolidated.
Revenue recognition: Revenue from the provision of subscription television
services is recognized at the time when the services are provided. Customers are
billed on a quarterly basis for the analog television services and on an annual
basis for the digital television services. High speed internet service customers
are billed on a monthly basis. Prepayment from all of the customers is deferred
to the appropriate period of services. Installation fee income is recognized
upon completion of the related installation work.
Results of operations
Three months ended June 30, 2005 and 2004
Revenue
Our revenue of $1,256,581 for the three months ended June 30, 2005 represents
the installation and subscription fees, premium digital service fees and added
value services fees of the Joint Venture received and to be received, net of
service tax whereas our revenue of $1,109,160 for the three months ended June
30, 2004 only included the installation and subscription fees and added value
services fees of the Joint Venture received and to be received, net of service
tax. The increase in our revenue of $147,421, representing a 13% increase, was
attributable to the combined effect of the sales of set-top boxes and cable
modems and the provision of premium digital services to customers for the three
months ended June 30, 2005 which amounted to $220,940 and the decrease in
installation fees received for the three months ended June 30, 2005. No such
sales and services were provided for the three months ended June 30, 2004.
Consulting Fees
Total consulting fees decreased by $635,569, representing a 77% decrease to
$194,643 for the three months ended June 30, 2005 from $830,212 for the three
months ended June 30, 2004. The decrease was primarily attributable to the
decrease in deferred consulting fees that resulted from the decrease in issuance
shares of the Company's common stock to consultants for their services rendered
and the decrease in the Company's stock price used in determining the fair
market value of those shares of common stock in accordance with the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation".
Directors' compensation
Total directors' compensation decreased by $79,077, representing a 71% decrease
to $32,692 for the three months ended June 30, 2005 from $111,769 for the three
months ended June 30, 2004. The decrease was primarily attributable to the
decrease in issuance of shares as directors' compensation for the three months
ended June 30, 2004. No shares were issued to the directors for the three months
ended June 30, 2005.
Professional fees
Total professional fees decreased by $66,718, representing a 51% decrease from
$130,239 for the three months ended June 30, 2004 to $63,521 for the three
months ended June 30, 2005. The decrease was primarily due to our decreased use
of professional services during the three months ended June 30, 2005.
19
Operating Expenses
Total operating expenses increased by $289,849 from $310,180 for the three
months ended June 30, 2004 to $600,029 for the three months ended June 30, 2005.
Total operating expenses represent the operating expenses incurred by both the
Company and the Joint Venture. The increase was mainly because of the combined
effect of an increase in operating expenses of $15,795 for analog television
services, the inclusion of operating expenses of $218,169 for digital television
services and an increase in operating expenses of the Company itself of $55,885.
The increase in operating expenses for analog television services is in line
with the increase in subscription fees received for analog television services.
There was no digital television service offered by our Baoding Joint Venture for
the three months ended June 30, 2004. The increase in operating expenses of the
Company itself resulted from an increase in business travel and entertainment
expenses for the three months ended June 30, 2005.
Interest income (expenses), net
Interest expenses, net for the three months ended June 30, 2005 was $228,867, as
compared to interest income, net of $124 for the three months ended June 30,
2004. The significant change primarily resulted from the inclusion of interest
on debt due to the preferred stockholders.
Minority interest
The minority interest represents the profit of the Joint Venture attributable to
the 51% equity interest not owned by the Company. The decrease in minority
interest of $109,842, representing a 55% decrease, from $200,861 for the three
months ended June 30, 2004 to $91,019 for the three months ended June 30, 2005
was in line with the decrease in the profit generated by the Joint Venture.
Deemed dividends
For the three months ended June 30, 2004, the Company recorded deemed dividends
of $27,221 on its redeemable convertible preferred stock whereas the Company
recorded nil deemed dividends for the three months ended June 30, 2005. The
substantial decrease in deemed dividends was caused by the fall in share price
below the fixed redemption price of the Preferred Stock of $0.70 per share. It
resulted in the mandatory redemption of the Preferred Stock after which no
deemed dividends were charged to retained earnings of the Company.
Net loss available for common stockholders
Net loss decreased to $580,077 for the three months ended June 30, 2005 from
$2,137,485 for the corresponding period of 2004, representing a decrease of
$1,557,408 or 73%. This decrease is primarily due to the combined effects of the
increases in net sales of $147,421, operating expenses of $289,849, and interest
expenses of $228,991, along with the decreases in consulting fees of $635,569,
directors' compensation of $79,077, administrative expenses of $3,806 and other
income (expenses), net of $98,081.
Six months ended June 30, 2005 and 2004
Revenue
Our revenue of $2,772,510 for the six months ended June 30, 2005 represents the
installation and subscription fees, premium digital service fees and added value
services fees of the Joint Venture received and to be received, net of service
tax whereas our revenue of $2,042,911 for the six months ended June 30, 2004
only included the installation and subscription fees and added value services
fees of the Joint Venture received and to be received, net of service tax. The
increase in our revenue of $729,599, representing a 36% increase, was mainly
attributable to the sales of set-top boxes and cable modems and the provision of
premium digital services to customers for the six months ended June 30, 2005,
which amounted to $686,605. No such sales and services were provided for the six
months ended June 30, 2004.
20
Consulting Fees
Total consulting fees decreased by $1,588,806, representing a 74% decrease to
$548,244 for the six months ended June 30, 2005 from $2,137,050 for the six
months ended June 30, 2004. The decrease was primarily attributable to the
decrease in issuance shares of the Company's common stock to consultants for
their services rendered and the decrease in the Company's stock price used in
determining the fair market value of those shares of common stock in accordance
with the Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation".
Directors' compensation
Total directors' compensation decreased by $231,956, representing a 69% decrease
to $104,739 for the six months ended June 30, 2005 from $336,695 for the six
months ended June 30, 2004. The decrease was primarily attributable to the
combined effect of the reduction in directors' compensation in shares and the
decrease in the Company's stock price as most of the directors' compensation was
in shares.
Operating Expenses
Total operating expenses increased by $592,490 from $559,479 for the six months
ended June 30, 2004 to $1,151,969 for the six months ended June 31, 2005. Total
operating expenses represent the operating expenses incurred by both the Company
and the Joint Venture. The increase was mainly because of the combined effect of
an increase in operating expenses of $62,991 for analog television services, the
inclusion of operating expenses of $562,075 for digital television services and
a decrease in operating expenses of the Company itself of $32,576. The increase
in operating expenses for analog television services is in line with the
increase in subscription fees received for analog television services. There was
no digital television service offered by our Baoding Joint Venture for the six
months ended June 30, 2004. The decrease in operating expenses of the Company
itself resulted from a decrease in business travel and entertainment expenses
and discontinued employment of one part-time assistant to the Chief Financial
Officer.
Administrative Expenses
Total administrative expenses decreased by $34,138 from $246,682 for the six
months ended June 30, 2004 to $212,544 for the six months ended June 30, 2005.
Total administrative expenses represent the administrative expenses incurred by
the Joint Venture only. The decrease was mainly attributable to the decrease in
salaries and staff benefits of approximately $21,424 and inclusion of an
advisory fee of approximately $12,145 for the six months ended June 30, 2004.
There was no such advisory fee for the six months ended June 30, 2005.
Bad debts
Bad debts represent an increase in the doubtful debt provision made for accounts
receivables of our Baoding Joint Venture by $174,127 for the six months ended
June 30, 2005, whereas there was no such provision made for accounts receivables
for the corresponding period in 2004.
Interest income (expenses), net
Interest expenses, net for the six months ended June 30, 2005 was $308,419, as
compared to interest income, net of $332 for the six months ended June 30, 2004.
The significant change primarily resulted from the inclusion of interest on debt
owing to the preferred stockholders.
Losses on extinguishment of debt
For the six months ended June 30, 2004, the Company recorded a loss on
extinguishment of debt of $1,174,183. This represented the premium recognized on
the Preferred Stock requested by its holders to be redeemed by the Company.
There was no such loss for the six months ended June 30, 2005.
Minority interest
The minority interest represents the profit of the Joint Venture attributable to
the 51% equity interest not owned by the Company. The decrease in minority
interest of $102,306, representing a 32% decrease, from $322,769, for the six
months ended June 30, 2004 to $220,463 for the six months ended June 30, 2005
was in line with the decrease in the profit generated by the Joint Venture.
21
Deemed dividends
For the six months ended June 30, 2004, the Company recorded deemed dividends of
$60,249 on its redeemable convertible preferred stock whereas the Company did
not have deemed dividends for the six months ended June 30, 2005. The
substantial decrease in deemed dividends was caused by the fall in share price
below the fixed redemption price of the Preferred Stock of $0.70 per share. It
resulted in the mandatory redemption of the Preferred Stock after which no
deemed dividends were charged to retained earnings of the Company.
Net loss available for common stockholders
Net loss decreased to $1,107,044 for the six months ended June 30, 2005 from
$3,818,867 for the corresponding period of 2004, representing a decrease of
$2,711,823 or 71%. This decrease is primarily due to the combined effects of the
increases in net sales of $729,599, operating expenses of $592,490, bad debts of
$174,127 and interest expenses, net of $308,751, along with the decreases in
consulting fees of $1,588,806, directors' compensation of $231,956, professional
fees of $66,495, administrative expenses of $34,138 and other income (expenses),
net of $127,927 and because there is no loss on extinguishment of debt for the
six months ended June 30, 2005.
Financial condition, liquidity, capital resources
For the six months ended June 30, 2005, we generated cash from operating
activities of $1,029,011 and we used $808,123 to purchase property and equipment
and further advanced $144,142 to the PRC joint venture partner.
Although the Company incurred an operating loss of $1,107,044 for the six months
ended June 30, 2005, the Company generated positive cash flows of $1,029,011
from operating activities. The operating loss for the six months ended June 30,
2005 included items which are of either non-cash or non-recurrent nature: (i)
expensed common stocks for consulting fees of $548,244; (ii) expensed common
stock for directors' compensation of $30,380, (ii) allowance for doubtful debts
of $174,127 (iii) interest due to preferred stockholders of $424,114 and (iv)
depreciation and amortization of $852,055.
As of June 30, 2005, the Company had cash and cash equivalents of $199,994. Our
current assets were $1,305,921 and our current liabilities were $10,498,610,
which resulted in a current ratio of 0.12. We had no capital expenditure
commitment outstanding as of June 30, 2005.
The cash requirements of the Company and its subsidiaries during the next twelve
months include the normal operating expenditures of the Baoding joint venture,
payments for professional fees, and compensation of the Company's directors.
While the Baoding joint venture has been generating positive cash flow and does
not have material commitments for capital expenditures, we anticipate, based on
the scale of the Baoding joint venture's existing operations, that the Baoding
joint venture's projected cash flows from operations would be sufficient to
support its planned operations for the next twelve months. To make the required
payments for professional fees and directors' compensation, the Company expects
to receive a cash dividend from the Baoding joint venture. The board of
directors of the Baoding joint venture has proposed to distribute a cash
dividend in the amount of RMB36 million (approximately $4,337,300) to its equity
holders, although the payment of such dividend is contingent upon the approval
by the State Administration of Foreign Exchange (SAFE) and by the local PRC tax
bureau. In order to fulfill the cash dividend obligation, the Baoding joint
venture plans to borrow money from the local Chinese bank by using its assets
and its right to receive subscription fees as collateral.
The Company's working capital deficit at June 30, 2005 was primarily
attributable to the amount due to the preferred stockholders, Gryphon Master
Fund, L.P. ("Gryphon"), of $5,208,611 as a result of an agreed judgment entered
against the Company in Gryphon Master Fund, L.P. v. China Cable and
Communication Inc. (U.S District Court, Northern District of Texas, Dallas
Division - Cause No. 3:04cv1617B). As explained more fully in Part II, Item 1 of
this quarterly report, on June 20, 2005, the Company and Gryphon represented to
the Court that they had agreed to an entry of judgment on the Gryphon's claim
against the Company. Therefore, Gryphon was granted a judgment against the
Company in the amount of $5,165,119.99. Gryphon was also granted recovery of
post-judgment interest on the judgment at a rate of 6% per annum from June 20,
2005 until the judgment is paid by the Company. In a separate agreement, the
Company agreed to pay Gryphon a sum of $35,000 to cover legal costs incurred by
Gryphon in two installments: $20,000 on or before June 30, 2005 and $15,000 on
or before July 31, 2005. In exchange for the $35,000 payment, Gryphon agreed not
to execute on the agreed judgment on or before September 30, 2005. Subsequent to
June 30, 2005, the Company completed payment of the $35,000 to Gryphon.
22
To settle the agreed judgment debt, together with the post-judgment interest on
the agreed judgment, the Company is actively seeking strategic investors in the
PRC and intends to raise additional capital through the issuance of debts or
equity securities, although there can be no assurance that we will be successful
in obtaining this financing. Meanwhile, the Company is negotiating with Gryphon
to extend the repayment period to allow more time for the Company to seek
strategic investors to settle the debt by issuing the shares of the Company's
stock.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values. We incurred a net loss of $1,107,044 for the six months ended June 30,
2005 and our current liabilities exceeded our current assets by $9,192,689 at
June 30, 2005. These factors create substantial doubt about our ability to
continue as a going concern.
The Company's management continues to evaluate the Company's cash requirements
and the availability of debt and equity financing to meet the Company's
financial obligations as they fall due.
Plan of Operation
We do not anticipate generating sufficient positive internal operating cash flow
to meet our financial obligations as mentioned above.
As mentioned above, the cash requirements of the Company and its subsidiaries
during the next twelve months include the normal operating expenditures of the
Baoding joint venture, and the payments for professional fees, and compensation
for the Company's directors. While the Baoding joint venture has been generating
positive cash flow and does not have material commitments for capital
expenditures, we anticipate, based on the scale of the Baoding joint venture's
existing operations, that the Baoding joint venture's projected cash flows from
operations would be sufficient to support its planned operations for the next
twelve months. To make the required payments for professional fees and
directors' compensation, the Company expects to receive a cash dividend from the
Baoding joint venture. The board of directors of the Baoding joint venture has
proposed to distribute a cash dividend in the amount of RMB36 million
(approximately $4,337,300), although the payment of such dividend is contingent
upon the approval by SAFE and by the local PRC tax bureau. In order to fulfill
the cash dividend obligation, the Baoding joint venture plans to borrow money
from the local Chinese bank by using its assets and its right to receive
subscription fees as collateral.
Although the Company expects to receive the cash dividend from the Baoding joint
venture, we cannot meet the exceptional cash requirements for payment of the
agreed judgment debt, as described above, without seeking strategic investors
and raising additional capital through the issuance of debt or equity
securities. Meanwhile, the Company, through its appointed attorney, is now
negotiating with Gryphon to extend the repayment period to allow more time for
the Company to seek strategic investors and raise additional capital for use in
settling the debt or for Gryphon to accept shares of the Company's stock as
settlement for the agreed judgment. However, there can be no assurance that we
will be successful in finding the strategic investor and/or obtaining this
financing or that Gryphon will accept our share settlement proposal.
To the extent that we are unable to successfully raise the capital necessary to
meet our financial obligations on a timely basis and under acceptable terms and
conditions, we will not have sufficient cash resources to settle the agreed
judgment debt and maintain the Company's normal operations, and may have to
dispose of our interest in the Baoding joint venture and consider a formal
restructuring or reorganization.
Termination of Efforts to Acquire of Macau Media Holdings Ltd.
In November 2003, the Company paid a $3,000,000 refundable deposit to the owner
of Macau Media Holdings Limited ("Macau Media") under a letter of intent for the
Company's proposed acquisition of Macau Media and its subsidiaries. The
completion of the proposed acquisition was subject to due diligence and Chinese
government approval for the renewal of Macau Media's satellite broadcasting
license.
The purchase price for Macau Media was originally to consist of $3,000,000 in
cash and 8,500,000 shares of Company common stock. If the proposed acquisition
was not completed, the deposit of $3,000,000 would be refunded.
In early 2005, the Company received notice from Macau Media that the Chinese
government did not approve the renewal of Macau Media's satellite broadcasting
licenses. Management of the Company has determined that the owner of Macau Media
is not financially capable of repaying the $3,000,000 deposit. Accordingly, the
deposit was fully reserved in the statements of operations and comprehensive
income for the year ended December 31, 2004.
23
Exchange rate
Fluctuations of currency exchange rates between Renminbi and the United States
dollar could adversely affect our business since our sole investment conducts
its business primarily in China, and its revenue from operations is settled in
Renminbi. The Chinese government controls its foreign reserves through
restrictions on imports and conversion of Renminbi into foreign currency.
Although the Renminbi to United States dollar exchange rate has been stable
since January 1, 1994 and the Chinese government has stated its intention to
maintain the stability of the value of the Renminbi, there can be no assurance
that exchange rates will remain stable. The Renminbi could devalue against the
United States dollar. Exchange rate fluctuations may adversely affect our
revenue arising from the sales of products in China and denominated in Renminbi
and our financial performance when measured in the United States dollar. On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in an approximately 2.0%
appreciation of the RMB against the U.S. dollar. While the international
reaction to the RMB revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more
flexible currency policy, which could result in a further and more significant
revaluation of the RMB against the U.S. dollar. Any significant revaluation of
RMB may materially and adversely affect our cash flows, revenues, earnings and
financial position, and the value of, and any dividends payable in U.S. dollars.
Recent accounting pronouncements
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1") which provides new guidance for assessing impairment losses on
debt and equity investments. Additionally, EITF 03-1 includes new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of EITF 03-1. The
Company will evaluate the effect, if any, of EITF 03-1 when final guidance is
released.
In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151, Inventory Costs, which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151
will have a material impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123-R, Share Based Payments, which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. The cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS 123-R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Management believes the adoption of this
pronouncement will not have a material effect on our consolidated financial
statements.
Also, in December 2004, the FASB issued SFAS 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that the exchange of non-monetary assets should be measured using the estimated
fair market value of the assets exchanged. SFAS No. 153 eliminates the narrow
exception for non-monetary exchanges of similar productive assets, and replaces
it with a broader exception for exchanges of non-monetary assets that do not
have commercial substance. A non-monetary exchange has "commercial substance" if
the future cash flows of the entity are expected to change significantly as a
result of the transaction. This pronouncement is effective for monetary
exchanges in fiscal periods beginning after June 15, 2005. Management believes
the adoption of this pronouncement will not have a material effect on our
consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3".
This statement replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements",
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. This statement is effective for accounting
changes and correction of errors made in fiscal years beginning after December
15, 2005. Management believes the adoption of this pronouncement will not have a
material effect on our consolidated financial statements.
24
In June 2005, the FASB ratified the EITF consensus to amend EITF No. 96-16,
"Investor's Accounting for an Investee When the Investor Has a Majority of the
Voting Interest but the Minority Shareholders Have Certain Approval or Veto
Rights". The EITF agreed to amend the Protective Rights section of this
consensus, as well as Example of Exhibit 96-16A, to be consistent with the
consensus reached in Issue No. 04-5, "Determining Whether a General Partner, or
the General Partners as a Group, Controls a Limited Partnership or Similarly
Entity When the Limited Partners Have Certain Rights." The provisions of this
amendment should be applied prospectively to new investments and to investment
agreements that are modified after June 29, 2005. Management believes the
adoption of this pronouncement will not have a material effect on our
consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed
by management to have a material impact on the Company's present or future
consolidated financial statements.
ITEM 3. CONTROLS AND PROCEDURES
1) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in the reports filed under the Exchange Act of 1934 is
accumulated and communicated to the Company's management, including its
principal executive and financial officers, as appropriate, to allow timely
decisions regarding required disclosure.
Within the 90 days prior to the filing of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including its principal executive and financial officer of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that Company files and submits under the
Exchange Act of 1934 is recorded, processed, summarized and reported as and when
required.
2) Changes in Internal Control
There were no changes in the Company's internal controls or in other factors
that could have significantly affected those controls subsequent to the date of
the Company's most recent evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the pending litigation described below with Gryphon Master Fund,
L.P., the Company is not a party to any pending or, to the best of our
knowledge, any threatened legal proceedings, and no director, officer or
affiliate of the Company, or owner of record or of more than five percent (5%)
of the securities of the Company, or any associate of any such director, officer
or security holder is a party adverse to the Company.
On June 20, 2005, an agreed judgment was entered against the Company in Gryphon
Master Fund, L.P. v. China Cable and Communication Inc. (U.S. District Court,
Northern District of Texas, Dallas Division - Cause No. 3:04cv1617B)
As previously reported in the Company's quarterly report on Form 10-QSB for the
period ended March 31, 2005, on September 24, 2003, the Company completed the
sale of 2,758,621 shares of the Company's restricted 8% Redeemable Convertible
Preferred Stock, par value $0.0001 per share (the "Preferred Stock"), to Gryphon
Master Fund, L.P., a Bermuda limited partnership ("Gryphon"), for $1.45 per
share (the "Purchase Price"), or an aggregate purchase price of $4,000,000. The
Company was required to redeem all then outstanding shares of Preferred Stock on
September 24, 2008, the fifth anniversary of the date on which the preferred
stock was issued, at a redemption price equal to the Purchase Price, plus
accrued but unpaid dividends. However, if the "Current Market Price" (defined as
the volume weighted average price of the Company's common stock on the 10
consecutive trading days immediately preceding such date as reported on the
Over-the-Counter Bulletin Board of the Company's Common Stock) is equal to or
less than $0.70, the holders of the Preferred Stock have the right to require
the Company to redeem all or any portion of the Preferred Stock at a redemption
price, in cash, equal to $1.67 per share, plus all accrued but unpaid dividends.
25
On June 14, 2004, Gryphon requested that the Company redeem the Preferred Stock
as the market price of the Company's common stock was equal to or less the $0.70
per share for more than ten consecutive trading days. On July 26, 2004, Gryphon
filed a complaint in the United States District Court for the Northern District
of Texas, Dallas Division alleging that the Company breached its contract by
failing to redeem the Preferred Stock. Gryphon sought the redemption price of
$4,606,897; accrued unpaid dividends equal to $220,226; interest of $888 per day
from June 14, 2004 until the date of redemption; pre-judgment and post-judgment
interest; attorneys' fees; court costs; and other such relief. The Company
retained counsel to represent it in this matter and filed its answer to the
complaint.
On June 20, 2005, the Company and Gryphon represented to the Court that they had
agreed to an entry of judgment on Gryphon's claim against the Company.
Therefore, Gryphon was granted a judgment against the Company in the amount of
$5,165,119.99. Gryphon was also granted recovery of post-judgment interest on
the judgment at a rate of 6% per annum from June 20, 2005 until the judgment is
paid by the Company. In a separate agreement, the Company agreed to pay Gryphon
a sum of $35,000 to cover legal costs incurred by Gryphon in two installments:
$20,000 on or before June 30, 2005 and $15,000 on or before July 31, 2005. In
exchange for the $35,000 payment, Gryphon agreed not to execute on the agreed
judgment on or before September 30, 2005. Subsequent to June 30, 2005, the
Company completed payment of the $35,000 to Gryphon. To settle the agreed
judgment debt, together with the post-judgment interest on the agreed judgment,
the Company is actively seeking strategic investors in the PRC and intends to
raise additional capital through the issuance of debts or equity securities,
although there can be no assurance that we will be successful in obtaining this
financing. The Company is currently negotiating with Gryphon to extend the
repayment period for the agreed judgment to allow more time for the Company to
seek strategic investors to settle the debt by issuing the shares of the
Company's stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
(a) None.
(b) There were no changes to the procedures by which security holders may
recommend nominees to our board of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
26
EXHIBIT INDEX
Exhibit
Number Description
3(i)(a) Certificate of Incorporation of CCCI. (1)
3(i)(b) Certificate of Amendment of Certificate of Incorporation
(filed November 17, 1989). (2)
3(i)(c) Certificate of Amendment of Certificate of Incorporation
(filed July 1, 2003). Filed herewith. (3)
3(ii) Bylaws of CCCI. (1)
31.1 Rule 13a-14(a) Certifications of Chief Executive Officer
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Rule 13a-14(a) Certifications of Chief Financial Officer
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
---------------------
(1) Incorporated by reference from CCCI's Registration Statement on
Form S-18, effective November 12, 1985.
(2) Incorporated by reference from CCCI's Annual Report on Form 10-K
for the fiscal year ended October 31, 1989.
(3) Incorporated by reference from CCCI's Form 8-K filed on
September 29, 2003.
(b) REPORTS ON FORM 8-K:
During the six months ended June 30, 2005, the Company filed the following
Current Report/s on Form 8-K:
1. Form 8-K filed on April 19, 2005 - Termination of efforts to acquire
Macau Media Holdings Ltd. and write-off of deposit in connection
thereto.
27
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA CABLE AND COMMUNICATION, INC.
Date: August 17, 2005 /s/ Raymond Ying-Wai Kwan
----------------------------------------
Name: Raymond Ying-Wai Kwan
Title: Chief Executive Officer
Date: August 17, 2005 /s/ Yau-Sing Tang
----------------------------------------
Name: Yau-Sing Tang
Title: Chief Financial Officer
28